Working out the return on a policy you hold

Most people holding a savings-linked policy have never known its return. This chapter is the method, and it is the same one the Measuring your return subject sets out, applied to a contract designed to resist it.

Step 1 — build the cash flows

List every movement with its date:

Entry	Sign
Each premium paid	negative
Each survival or money-back payout received	positive
The maturity amount, on its date	positive

For a policy you are valuing today rather than to maturity, the last entry is instead the surrender value as at today, entered as a positive flow on today's date — exactly as the XIRR chapter treats a current holding value.

Use real dates. Premiums paid annually over fifteen years are fifteen separate flows, and the whole point is that the first was invested far longer than the last.

Step 2 — solve for the rate

An XIRR over those flows gives the annual rate. The policy-return calculator does it, as does any spreadsheet.

Two cautions carried over from the XIRR chapter. Signs must be consistent, and the answer is a money-weighted rate — which is what you want, because the question is about your money.

Step 3 — value the cover separately

The honest complication. Your premium bought protection as well as savings, so the XIRR understates the policy by whatever the cover was worth.

Price the cover independently. Get a quote for term insurance of the same sum assured for your age and the remaining term. If a ₹12.5 lakh sum assured would cost ₹4,000 a year as term, then roughly ₹4,000 of each premium was buying protection and the rest was saving.

Then recompute the XIRR using only the savings portion — premium less the term equivalent — against the same maturity value. That gives the return on the part that was actually invested, which is the fair comparison against a fund or a deposit.

This is the calculation that decides whether the bundle was defensible. If the savings portion earns a competitive rate, the product did two jobs acceptably. Usually it does not, which is chapter 3's conclusion arrived at from your own numbers rather than from a general argument.

Step 4 — the decision, which is not about the past

Here is where most people reason badly, and the error has a name.

What you have already paid is gone. It is a sunk cost, and the Loss aversion and the reference point chapter in Behavioural finance explains exactly why it feels otherwise: the premiums paid become a reference point, you are below it, and being below a reference point makes people risk-seeking and reluctant to realise the loss.

"I've already put in ₹3.75 lakh, I can't stop now" is the disposition effect wearing a policy document.

The correct question is forward-looking:

If I pay the remaining premiums, what return do I earn on those future payments alone?

That is the marginal return, and it is the only one that should decide anything.

The three options

Continue. Pay the remaining premiums, receive the maturity amount.

Make it paid-up. Stop paying, keep a reduced sum assured and a reduced maturity benefit, receive it at maturity. This is the option people forget, and it is often better than surrender because it avoids crystallising the early-year costs while releasing the future premiums.

Surrender. Take the surrender value now and redeploy it. Chapter 3 noted the floor the rules now provide — a special surrender value at least equal to the present value of paid-up benefits, payable after the first policy year.

And if you surrender, replace the cover first. Chapter 1's point: a household with dependants that cancels a policy without buying term is briefly uninsured, and that is a worse error than a poor return.

Working the problem

Five years into twenty. ₹75,000 a year paid. Surrender value ₹2,10,000. Continuing projects ₹28,00,000 at maturity.

First, the return so far — for information only. Five annual outflows of ₹75,000 against ₹2,10,000 available today. That is ₹3,75,000 paid for ₹2,10,000 — a substantial negative return, around −20% a year, because early-year charges have been absorbed.

This figure must not drive the decision. It is entirely sunk, and treating it as a reason to continue is the error named above.

The decisive calculation — the marginal return on continuing.

If you surrender today you have ₹2,10,000 in hand. If you continue, you forgo that ₹2,10,000 and pay ₹75,000 a year for fifteen more years, to receive ₹28,00,000 at the end.

So the cash flows for the "continue" decision are:

Date	Flow
Today	−₹2,10,000 (the surrender value given up)
Years 1–15	−₹75,000 each
Year 15	+₹28,00,000

Solving for the rate that makes these consistent gives approximately 7.0% a year.

Now compare that against alternatives for the same money and horizon, and note the comparison is now a fair one: a PPF at 7.1% tax-free, a taxable deposit netting about 4.9% at a 30% slab, or a diversified fund with a higher expected return and real volatility.

The reading. About 7% on the forward cash flows, and if the maturity proceeds are tax-exempt under the conditions chapter 7 sets out, that is roughly comparable with PPF and clearly better than a taxable deposit — so continuing is defensible, even though the policy has been a poor investment so far.

That is the central lesson and it is counter-intuitive. A policy that has treated you badly can still be worth continuing, because the costs that made it bad have already been charged. The front-loading that destroyed the early return is precisely what makes the remaining years look better.

What would reverse the answer: if the marginal rate came out near 4–5%, surrender or paid-up would win comfortably. If you need the money, liquidity decides it regardless. And if the ₹28,00,000 is a projected rather than guaranteed figure — which for a participating policy it largely is — then the 7% is an estimate and should be recomputed using the guaranteed component alone to see the floor.

Before doing anything: check what cover you would lose, and price term for it.

The point

Build every premium and payout as a dated cash flow, solve for the XIRR, and value the life cover separately by pricing equivalent term — then recompute on the savings portion alone to get the return on the part that was actually invested. The decision is never about what you have already paid, which is sunk and which loss aversion turns into a reason to continue; it is about the marginal return on the future premiums, computed by treating the surrender value you give up as an outflow today. A policy that has performed badly can still be worth continuing, because the front-loaded charges that ruined the early years are already paid.